Through the Looking Glass: Indirect Inference via Simple Equilibria

58 Pages Posted: 2 Jun 2014 Last revised: 10 Jun 2014

See all articles by Laurent E. Calvet

Laurent E. Calvet

SKEMA Business School; CEPR

Veronika Czellar

SKEMA Business School

Date Written: November 10, 2013

Abstract

This paper proposes an indirect inference (Gourieroux, Monfort and Renault, 1993; Smith, 1993) estimation method for a large class of dynamic equilibrium models. Our approach is based on the observation that the econometric structure of these systems naturally generates auxiliary equilibria that can serve as building blocks for estimation. We use this insight to develop an accurate estimator for the long-run risk model of Bansal and Yaron (2004). We demonstrate the accuracy of our method by Monte Carlo simulation and estimate the long-run risk model on U.S. data. We also illustrate the good performance of the methodology on an asset pricing model with investor learning.

Keywords: Hidden Markov model, long-run risk, learning, value at risk, indirect inference, particle filters

JEL Classification: C01, C13, C15, C53, C58

Suggested Citation

Calvet, Laurent E. and Czellar, Veronika, Through the Looking Glass: Indirect Inference via Simple Equilibria (November 10, 2013). HEC Paris Research Paper No. FIN-2014-1048, Available at SSRN: https://ssrn.com/abstract=2444445 or http://dx.doi.org/10.2139/ssrn.2444445

Laurent E. Calvet (Contact Author)

SKEMA Business School ( email )

5 Quai Marcel Dassault
Suresnes, 92150
France

CEPR ( email )

33 Great Sutton Street
London, EC1V 0DX
United Kingdom

Veronika Czellar

SKEMA Business School ( email )

5 quai Marcel Dassault
Suresnes, 92156
France

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